ACCOUNTANTS CREATE A PONZI SCHEME: MORE BUSINESS AS USUSAL

Thanks to our complex tax and legal system, accounting is one of those few remaining fields in America in which there are still good paying jobs. To become an accountant it takes years of study at an accredited college plus years of on the job training not to mention the tests that must be passed to become a certified public accountant or CPA.

In the following release of information by the SEC two accountants developed a scheme to sell fake securities in a gas pipeline to the public. These investment securities paid a 10% rate of return which of course is generally not available during a recession. On the other hand, many pipelines do pay a dividend in excess of 5% to holders of securities in what are known as Master Limited Partnerships or MLP’s. I currently own a few shares in an MLP that pays about 6.5 %. An MLP is different than a regular company in that the MLP is set up to return much of the revenue to investors rather than to keep most of the revenue for retained earnings for future expansion and sales promotions. There are also differences in how taxes are paid on an MLP for which you must consult an accountant to learn such details.

In the following case the accountants allegedly used a gas pipeline that had not been used for years as the basis of setting up a Ponzi scheme to pay old investors a large dividend based upon selling more securities to new suckers (investors). Please read the following excerpt from the SEC online site if you wish to know the details of this scheme:

“Washington, D.C., July 22, 2010 — The Securities and Exchange Commission today charged two certified public accountants with fraud and is seeking an emergency court order to freeze their assets after they sold phony securities to investors and then stole the money for personal use.
The SEC alleges that Laurence M. Brown and Ronald Mangini, who reside in Westchester County, N.Y., took the name of an inoperative company owned by a client of their accounting firm and sold investors fake promissory notes and common stock in what they purported to be a profitable company operating a gas pipeline in Tennessee. They falsely touted themselves as senior officers of the company, which they proclaimed to have a captive market in its area and a stable minimum rate of production with quality gas that could be sold well above market prices. What Brown and Mangini concealed from investors was that the pipeline had been inoperative for more than a decade. Behind the scenes, Brown and Mangini were instead operating a Ponzi scheme and diverting investor funds into their personal bank accounts and those of family members.

"Brown and Mangini not only deceived investors into making investments in a pipeline that was not producing any gas at all, but they stole the identity of a company owned by a client in order to do it," said George Canellos, Director of the SEC's New York Regional Office. "Brown and Mangini also victimized and betrayed the trust of other accounting clients who invested in their scheme."

According to the SEC's complaint, filed in federal court in Manhattan, Brown and Mangini began selling common stock and promissory notes of a company called Infinity Reserves-Tennessee Inc. as early as April 2008. They peddled the phony securities to clients of their accounting practice and other investors. Without authorization from the client who solely owned Infinity Reserves, Brown and Mangini used the company name to sell the stock and notes. Brown and Mangini falsely represented themselves as senior officers of Infinity Reserves with authority to sell the securities, calling themselves "president" and "secretary-treasurer" respectively. The phony notes promised investors a 10 percent annual return that would be paid semiannually on the principal amount of the investment.

According to the SEC's complaint, Infinity Reserves owns one principal asset — a gas gathering and trunk pipeline system located in Tennessee that it has not operated for more than a decade. The offering document that Brown and Mangini provided investors falsely portrays the investment as interests in an active system with an interconnect into the Duke Energy main east-west trunk line. The offering document falsely explained supposed merits of the investment and made various untrue statements while assuring investors that Infinity Reserves enjoyed a captive market in its area, a stable minimum rate of production, and quality gas that could be sold at a 20 percent premium over market prices. The offering document did not tell investors that the pipeline had been inoperative for years and thus in reality had no market for its gas and no minimum rate of production.

The SEC alleges that Brown and Mangini illegally obtained more than $2.1 million from investors. In classic Ponzi scheme fashion, they returned approximately $136,000 to certain investors in the form of interest payments. At least $1.6 million of investor funds were transferred to personal bank accounts controlled by Brown, Mangini, or family members including Mangini's wife and Browns's wife and daughter. The family members are named as relief defendants in the SEC's complaint for the purposes of recovering investor funds in their possession.

The SEC's complaint charges Brown and Mangini with violations of the anti-fraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. In addition to the emergency relief, the SEC's complaint seeks permanent injunctions, disgorgement of the defendants' and relief defendants' ill-gotten gains plus prejudgment interest, and financial penalties from the defendants.

In addition to the SEC's charges, the U.S. Attorney's Office for the Southern District of New York today brought criminal charges against Laurence Brown concerning the same illegal activities alleged in the SEC's complaint.

Brown is a repeat securities law offender. In 1994, the SEC charged Brown with, among other things, violations of the antifraud provisions of the federal securities laws in connection with another offering fraud. Brown was enjoined from future violations of those provisions and barred from associating with any broker, dealer, government securities broker or dealer, investment company, investment adviser, or municipal securities dealer.”

I give two thumbs up to the SEC and to the U.S. Attorney’s office for the Southern District of New York. The SEC can only recover stolen money and implement fines but, there are others in government who can make stealing peoples life savings a real crime. But, of course there are many politicians who would disagree with what they call “making a business practice a crime” or “criminalizing business”.

SEC GOES AFTER PENNY STOCK FRAUDSTERS

When stocks are really low priced there is usually a reason for it. Many low priced companies either offer really new products which may not be accepted by the public or, the company could be one that is in bankruptcy or going into bankruptcy. Hence, the stock is selling at a very low price. In many cases this investing in low priced stocks is a bit of a gamble. However, sometimes this gamble can pay off big time as happened recently after the last big stock market meltdown.

One favorite way that many entrepreneurs make millions is to buy up a lot of stock in a really cheap company and then recommend that stock in news letters, on TV business shows or, in this case on Facebook and Twitter (the new technology for fraudsters). The following is an excerpt from the SEC web site regarding the case the Sec has brought against a Canadian couple and the companies they control.

“Washington, D.C., June 29, 2010 — The Securities and Exchange Commission announced today that it has obtained an emergency asset freeze against a Canadian couple who fraudulently touted penny stocks through their website, Facebook and Twitter. The SEC also charged two companies the couple control and obtained an asset freeze against them.
According to the SEC's complaint, the defendants profited by selling penny stocks at or around the same time that they were touting them on www.pennystockchaser.com. The website invites investors to sign up for daily stock alerts through email, text messages, Facebook and Twitter.
Since at least April 2009, Carol McKeown and Daniel F. Ryan, a couple residing in Montreal, Canada, have touted U.S. microcap companies. According to the SEC's complaint, McKeown and Ryan received millions of shares of touted companies through their two corporations, defendants Downshire Capital Inc., and Meadow Vista Financial Corp., as compensation for their touting. McKeown and Ryan sold the shares on the open market while PennyStockChaser simultaneously predicted massive price increases for the issuers, a practice known as "scalping."

"As alleged in our complaint, McKeown and Ryan used all the modern methods to communicate with investors including the PennyStockChaser website, e-mail, text messages, Facebook, and Twitter yet failed to adequately communicate that their rosy predictions for touted stocks were accompanied by their sales of those very same stocks." said Eric I. Bustillo, Director of the SEC's Miami Regional Office.

The SEC's complaint, filed in the U.S. District Court for the Southern District of Florida, also alleges McKeown, Ryan and one of their corporations failed to disclose the full amount of the compensation they received for touting stocks on PennyStockChaser. The SEC alleges that McKeown, Ryan and their corporations have realized at least $2.4 million in sales proceeds from their scalping scheme.

The SEC's complaint charges McKeown, Ryan, Downshire Capital Inc. and Meadow Vista Financial Corp. with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. The SEC's complaint also charges McKeown, Ryan and Meadow Vista Financial Corp. with violating Section 17(b) of the Securities Act of 1933. In addition to the emergency relief already granted by the U.S. District Court the Commission also seeks a preliminary injunction and permanent injunction, along with disgorgement of ill-gotten gains plus prejudgment interest and the imposition of a financial penalty, penny stock bars against the individuals and the repatriation of assets to the United States.

In the course of its investigation, the SEC worked with the Quebec Autorité des marchés financiers (AMF), which was also investigating this matter. As a result of both ongoing investigations, the AMF obtained an emergency order freezing assets and a cease trade order against McKeown, Ryan, Downshire Capital Inc. and Meadow Vista Financial Corp. The SEC appreciates the collaboration with the AMF.”

The SEC did well in this case. The one lesson that everyone should take away from this case is that when you invest money you must do the research. Nobody is out there to give you completely free advice on where to invest your hard earned dollars. Most real investors do not share with others what they are investing in until they have already completed their purchase. If some large investor announced that he was buying stock in a certain company before he started to buy it then, he would end up paying perhaps twice as much for the stock. On the other hand, many big investors are more than happy to disclose that they have purchased stock in a given company after the fact because then the public jumps in and the big investor’s stocks price increases dramatically and that big investor makes a lot of money in a hurry. The public that jumps in when they find out a big investor has taken a position in a certain company may find their returns to be a big disappointment.

THE SEC STOPS FRAUD IN BEVERLY HILLS

The following article was released by the SEC on January 11, 2010. It is in regards to a fraud scheme in Beverly Hills which targeted the Iranian Americans community.

“Washington, D.C., Jan. 11, 2010 — The Securities and Exchange Commission today announced that it has charged Beverly Hills, Calif.-based NewPoint Financial Services, Inc. and its co-owners and controller for conducting an unregistered offering fraud aimed at Iranian-Americans in the Los Angeles area. The SEC obtained an emergency court order to freeze their assets and preserve remaining funds that were collected from investors.
The SEC’s complaint, filed in U.S. District Court for the Central District of California, alleges that NewPoint, co-owners John Farahi and Gissou Rastegar Farahi, and its controller Elaheh Amouei targeted investors in the Iranian-American community by touting New Point on a daily finance radio program that John Farahi hosts on a Farsi language radio station in the Los Angeles area. The SEC alleges that the Farahis or Amouei would then make appointments with interested listeners to discuss investment opportunities offered by NewPoint, and misled more than 100 investors into purchasing more than $20 million worth of debentures that they falsely told them were low-risk. Many investors also were falsely told that they were investing in FDIC-insured certificates of deposit, government bonds, or corporate bonds issued by companies backed by funds from the Troubled Asset Relief Program (TARP). The SEC alleges that most of the money raised was instead transferred to accounts controlled by the Farahis to, among other things, fund construction of their multi-million dollar personal residence in Beverly Hills.

“They lured victims with false promises of investment safety while secretly enriching themselves and diverting investor funds for their personal use,” said Rosalind R. Tyson, Director of the SEC’s Los Angeles Regional Office.

The SEC’s complaint further alleges that investor funds were used to engage in risky options futures trading in the stock market in which the Farahis lost more than $18 million in 2008 and the beginning of 2009. Since approximately June 2009, John Farahi and Amouei have made further misrepresentations to investors in an effort to lull them into keeping their money with NewPoint, saying that their money is safe and that they are guaranteed to get the entirety of their investment back. According to the SEC’s complaint, NewPoint lacks sufficient funds to make all investors whole, and John Farahi has been paying back some investors on a selective basis while failing to return money to other investors asking for a return of their investment.

The SEC has obtained a court order (1) freezing the assets of NewPoint, the Farahis, and Triple “J”; (2) appointing a temporary receiver over NewPoint and Triple “J”; (3) preventing the destruction of documents; (4) requiring accountings from NewPoint, the Farahis, and Triple “J”; and (5) temporarily enjoining NewPoint, the Farahis, and Amouei from future violations of the registration and antifraud violations of the federal securities laws. The SEC also seeks preliminary and permanent injunctions and civil penalties against the defendants and disgorgement with prejudgment interest against NewPoint, the Farahis, and Triple “J.” A hearing on whether a preliminary injunction should be issued against the defendants and whether a permanent receiver should be appointed is scheduled for Jan. 15, 2010, at 10:00 a.m.”

GOLDMAN SACHS AGREES TO PAY $550 MILLION IN FINES

Considering all the things that Goldman has had it’s fingers into which led to the demise of the U.S. economy this is kind of an obscure case to bring Goldman Sacs up on charges. The way to think of it is that this is like bringing a gangster to justice not for murder but, for tax evasion. The following is an excerpt from the SEC web site which explains the case in some detail.

“Washington, D.C., July 15, 2010 — The Securities and Exchange Commission today announced that Goldman, Sachs & Co. will pay $550 million and reform its business practices to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse.

In agreeing to the SEC's largest-ever penalty paid by a Wall Street firm, Goldman also acknowledged that its marketing materials for the subprime product contained incomplete information.

In its April 16 complaint, the SEC alleged that Goldman misstated and omitted key facts regarding a synthetic collateralized debt obligation (CDO) it marketed that hinged on the performance of subprime residential mortgage-backed securities. Goldman failed to disclose to investors vital information about the CDO, known as ABACUS 2007-AC1, particularly the role that hedge fund Paulson & Co. Inc. played in the portfolio selection process and the fact that Paulson had taken a short position against the CDO.

In settlement papers submitted to the U.S. District Court for the Southern District of New York, Goldman made the following acknowledgement:
Goldman acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was "selected by" ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson's economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.
"Half a billion dollars is the largest penalty ever assessed against a financial services firm in the history of the SEC," said Robert Khuzami, Director of the SEC's Division of Enforcement. "This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing."

Lorin L. Reisner, Deputy Director of the SEC's Division of Enforcement, added, "The unmistakable message of this lawsuit and today's settlement is that half-truths and deception cannot be tolerated and that the integrity of the securities markets depends on all market participants acting with uncompromising adherence to the requirements of truthfulness and honesty."
Goldman agreed to settle the SEC's charges without admitting or denying the allegations by consenting to the entry of a final judgment that provides for a permanent injunction from violations of the antifraud provisions of the Securities Act of 1933. Of the $550 million to be paid by Goldman in the settlement, $250 million would be returned to harmed investors through a Fair Fund distribution and $300 million would be paid to the U.S. Treasury.

The landmark settlement also requires remedial action by Goldman in its review and approval of offerings of certain mortgage securities. This includes the role and responsibilities of internal legal counsel, compliance personnel, and outside counsel in the review of written marketing materials for such offerings. The settlement also requires additional education and training of Goldman employees in this area of the firm's business. In the settlement, Goldman acknowledged that it is presently conducting a comprehensive, firm-wide review of its business standards, which the SEC has taken into account in connection with the settlement of this matter.

The settlement is subject to approval by the Honorable Barbara S. Jones, United Sates District Judge for the Southern District of New York.
Today's settlement, if approved by Judge Jones, resolves the SEC's enforcement action against Goldman related to the ABACUS 2007-AC1 CDO. It does not settle any other past, current or future SEC investigations against the firm. Meanwhile, the SEC's litigation continues against Fabrice Tourre, a vice president at Goldman.”

The interesting thing to note is that the above case settlement does not affect any ongoing or future investigations against Goldman for other crimes. The individual investigators at the SEC that brought these charges should be hailed as national heroes. They stood up against the most powerful organization in the world.

SEC ALLEGES MORTGAGE AND TARP FRAUD OF 1.5 BILLION DOLLARS

The SEC has found yet another head of a Mortgage company that not only committed mortgage fraud but, decided to defraud the government out of tarp funds (Known commonly as bank bail-out money). Although financial professionals and politicians alike tout the case that no one in particular is to blame for the financial melt-down it would seem that, the SEC keeps finding a few of the people who are to blame and benefited greatly from the financial meltdown. What is interesting is that the same fraudsters who committed mortgage securities fraud turned right around to defraud the government out of bank bail-out money. The following is an excerpt from the SEC sites which gives the details of this case:

“The SEC alleges that Lee B. Farkas through his company Taylor, Bean & Whitaker Mortgage Corp. (TBW) sold more than $1.5 billion worth of fabricated or impaired mortgage loans and securities to Colonial Bank. Those loans and securities were falsely reported to the investing public as high-quality, liquid assets. Farkas also was responsible for a bogus equity investment that caused Colonial Bank to misrepresent that it had satisfied a prerequisite necessary to qualify for TARP funds. When Colonial Bank's parent company — Colonial BancGroup, Inc. — issued a press release announcing it had obtained preliminary approval to receive $550 million in TARP funds, its stock price jumped 54 percent in the remaining two hours of trading, representing its largest one-day price increase since 1983.

As the country's mortgage markets began to falter, Farkas arranged the sale of more than one billion dollars worth of mortgage loans and securities he knew to be fictitious or impaired," said Lorin Reisner, Deputy Director of the SEC's Division of Enforcement. "Farkas also lied about a sham equity investment he engineered to defraud U.S. taxpayers and the U.S. Treasury's Troubled Asset Relief Program."

According to the SEC's complaint, filed in U.S. District Court for the Eastern District of Virginia, Farkas executed the fraudulent scheme from March 2002 until August 2009, when TBW — a privately-held company headquartered in Ocala, Fla. — filed for bankruptcy. TBW was the largest customer of Colonial Bank's Mortgage Warehouse Lending Division (MWLD). Because TBW generally did not have sufficient capital to internally fund the mortgage loans it originated, it relied on financing arrangements primarily through Colonial Bank's MWLD to fund such mortgage loans.
According to the SEC's complaint, TBW began to experience liquidity problems and overdrew its then-limited warehouse line of credit with Colonial Bank by approximately $15 million each day. The SEC alleges that Farkas pressured an officer at Colonial Bank to assist in concealing TBW's overdraws through a pattern of "kiting" whereby certain debits to TBW's warehouse line of credit were not entered until after credits due to the warehouse line of credit for the following day were entered. As this kiting activity increased in scope, TBW was overdrawing its accounts with Colonial Bank by approximately $150 million per day.

The SEC alleges that in order to conceal this initial fraudulent conduct, Farkas devised a plan for TBW to create and submit fictitious loan information to Colonial Bank. Farkas also directed the creation of fictitious mortgage-backed securities assembled from the fraudulent loans. By the end of 2007, the scheme consisted of approximately $500 million in fake residential mortgage loans and approximately $1 billion in severely impaired residential mortgage loans and securities. As a direct result of Farkas's misconduct, these fictitious and impaired loans were misrepresented as high-quality assets on Colonial BancGroup's financial statements.

The SEC alleges that in addition to causing Colonial BancGroup to misrepresent its assets, Farkas caused BancGroup to misstate to investors and TARP officials that it had obtained commitments for a $300 million capital infusion, which would qualify Colonial Bank for TARP funding. Farkas falsely told BancGroup that a foreign-held investment bank had committed to financing TBW's equity investment in Colonial Bank. Contrary to his representations to BancGroup and the investing public, Farkas never secured financing or sufficient investors to fund the capital infusion. When BancGroup and TBW later mutually announced the termination of their stock purchase agreement, essentially signaling the end of Colonial Bank's pursuit of TARP funds, BancGroup's stock declined 20 percent.

The SEC's complaint charges Farkas with violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. The SEC is seeking permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties. The SEC also seeks an officer-and-director bar against Farkas as well as an equitable order prohibiting him from serving in a senior management or control position at any mortgage-related company or other financial institution and from holding any position involving financial reporting or disclosure at a public company.”

The department of justice and FBI along with other government agencies has been noted to be involved with this case as members of the Financial Fraud Enforcement Task Force. Too often these cases result at best in just destroying the criminal careers of fraudsters by banning them from doing business in the securities markets. Financial crimes committed against the public seem to be the only crimes that have no personal consequences for the fraudsters. Perhaps Bernie Madoff would be spending his golden years living in the Cayman Islands had his son’s not turned him in for financial fraud. No doubt he is thinking that now as he sees how his peers are walking away very rich and very free as their criminals enterprises burn down behind them.

SEC CHARGES KENNETH IRA STAR WITH FRAUD

It seems another Wall Street investment guru has come under the scrutiny of the SEC. It looks like in this case the alleged perpetrators just openly stole funds from their client’s accounts. These alleged perpetrators stole the money in a way that they could easily be caught. The way the smart people on Wall Street steal is to pay themselves fantastical amounts of compensation no matter how poorly their companies are performing. Stealing money out of a company through perks and compensation should be the number one class at all business school. What is nice about looting a business via compensation packages is that it is legalized stealing. The government has given such schemes the stamp of approval. Setting up Ponzi schemes and taking money out of client accounts is just stupid.

The following is part of a press document released by the SEC and posted on their web site:

“Washington, D.C., May 27, 2010 — The Securities and Exchange Commission today charged Manhattan-based financial advisor Kenneth Ira Starr with fraud and is seeking an emergency court order to freeze his assets after he stole client money for his personal use, including the purchase last month of a multi-million dollar apartment where he and his wife now reside.

Starr and two entities he controls — Starr Investment Advisors LLC and Starr & Company LLC — have made unauthorized transfers of money in client accounts that ultimately wound up in Starr’s personal accounts. They violated securities laws pertaining to investment advisers in order to perpetrate the scheme.

Most investment advisers do not maintain physical custody of their clients’ assets, and those assets are instead held by qualified third-party custodians such as a regulated bank or a registered broker-dealer. In this case, the SEC alleges that certain client assets were held in a safe in Starr & Company’s offices despite the fact that Starr and his firms were not qualified custodians. Their ability to steal client funds was enhanced by the failure of Starr Investment Advisors to comply with asset custody rules that require firms to engage an independent public accountant to perform yearly surprise examinations of client assets in the firm’s custody.

“Starr breached his fiduciary duty as an investment adviser in the most egregious manner possible — he stole the funds his clients entrusted to him,” said George Canellos, Director of the SEC’s New York Regional Office. “Starr betrayed the trust of some clients who have looked to him for years for investment advice and financial guidance.”

According to the SEC’s complaint, filed in federal court in Manhattan, Starr and his companies transferred $7 million from the accounts of three clients between April 13 and April 16, 2010, without any authorization. The transferred funds were ultimately used to purchase a $7.6 million apartment on the Upper East Side in Manhattan on April 16. When one of the clients detected the unauthorized transfer and demanded the money be returned, Starr reimbursed that client with money siphoned from the account of another client without authorization. The other two investors have not been reimbursed.

The SEC’s complaint alleges that the unauthorized transfers in April 2010 were not the only instances when Starr misappropriated client funds. In August 2009, Starr and his entities began transferring approximately $1.7 million from the personal account of a client and from the account of a charity run by this client. These were all unauthorized transfers. In April 2010, an additional transfer of $750,000 was attempted from an account belonging to this client. But this time, Starr’s plans were frustrated because the bank alerted the client, who then halted the transfer. The client then reviewed the account transactions and uncovered the unauthorized $1.7 million transfers in 2009. When confronted about these transactions, Starr gave improbable explanations before eventually reimbursing the client with money that appears to have come from the bank account of another unrelated party.

The SEC’s complaint names two relief defendants in order to recover client assets now in their possession:

Diane Passage — Starr’s wife with whom he has a joint bank account.

Colcave LLC — An entity through which Starr purchased the apartment.

The SEC’s complaint charges each of the three defendants with violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 and, further, charges Starr Investment Advisors with violations of Section 206(4) of the Advisers Act and Rule 206(4)-2(a)(1) thereunder. In addition to the emergency relief, the SEC’s complaint seeks permanent injunctions barring future violations of the charged provisions of the federal securities laws, disgorgement of the defendants’ and relief defendants’ ill-gotten gains plus pre-judgment interest, and financial penalties from the defendants.”

With all the fraud charges the SEC actually files you hear of almost no criminal follow-up by the FBI or any authority that could put a few of the bad guys behind bars for at least the summer. At the very least they should have to wear a T-shirt for a month that says “I’m A Wall Street Fraudster”.